A Rare Dow Theory Signal

I said back on July 23 that I plan to be out of the market by October. Of course, plans can change. I'm always open to new information. But today something very rare happened and the time to exit the market (except for my positions in gold) might be fast approaching.

Back on August 27 the Dow hit its most recent highest high of 9580.63 but the Transports refused to match their most recent highest high. So, we had a classic Dow Theory non-confirmation. Not a big deal really. It just signaled caution.

Today the reverse happened, however. The Transports closed at 3806.75, a new high for the rally but the Dow closed at 9547.22, below their previous August 27 high. On his site tonight Richard Russell said he has only seen this "three times before in the last 60 years." He goes on...

"This is what I call a rare 'double non-confirmation.' First, the Transports were weak in that they could not confirm the Industrials. Today the Industrials were weak in that they could not confirm the Transports. These rare 'double non-confirmations,' in the past, have tended to signal the top."

Further signs of weakness will cause me to sell out of this rally - again, except for gold. Gold managed to stay above the apparently magical $1,000 per ounce mark for much of the day but finished down at $997.10. My gold stocks, some of which had been up about 20% in the last 3 days alone, were down significantly. But, I'm still way ahead so I can afford to be patient.

I don't know if it is Dow Theory but there's a trading maxim that goes: "In a Bull Market the Bull will try every way to knock you off his back. Ride the Bull." Which is what I intend to do because gold is in a solid Bull Market and has been since 2002. It's the "regular" markets that worry me.

The S&P and the Nasdaq hit new highs for the year today. Things seem fine. But, that "double non-confirmation" has me looking for the exits. I'm not sure this bear market rally has much further to run.

Why stay in at all? Why not just take the profits and be thankful for them instead of losing my ass in the Great Recession? The 50% Principle is in the back of my mind. According to that principle the current rally may test the mid-point between the highest high of the market back in 2007 and the lowest low from this March is about 10,350.

The Dow has already had an impressive rally, recouping about 38% of its losses. By comparison, the 1930 bear market rally recouped 52% of its losses - before plunging again.

So, there's some upside potential yet. And there's the possibility of plunge as well. The double non-confirmation, and its rarity, has me thinking get out. But simple inertia and greed keeps me in. Like I said, however, any further sign of weakness and I'll be out.

This is an interesting test to see how applicable Dow Theory, the oldest market monitoring theory, might still be today. Like I said, I'm always open to new information, especially from old, trusted sources.